WHEN ALAN Greenspan was chairman of the Federal Reserve, he spoke to members of Congress in a jargon as obscure as an utterance from the oracle of Delphi. But when the current Fed chairman, Ben Bernanke, testified Wednesday to the Joint Economic Committee, he delivered an unambiguous warning about federal deficits that government officials could not misunderstand — and should not fail to act upon.
“Addressing the country’s fiscal problems will require difficult choices, but postponing them will only make them more difficult,’’ Bernanke said. This was a generalized bit of advice to begin reducing deficits sooner rather than later. But in response to a query from Republican Senator Sam Brownback of Kansas, Bernanke explained pointedly: “At some point, the markets will make a judgment about, really, not our economic capacity but our political ability, our political will to achieve longer-term sustainability.’’
This was pretty blunt talk from a central banker. And it was right on the money.
The markets will want to see Congress and the administration exercise fiscal discipline to begin bringing down projected future deficits. If the politicians fail to cooperate on a mix of spending cuts and revenue increases, the market will punish the US economy with increased borrowing costs and inflation.
It was not Bernanke’s place to say that doctrinal purity and partisan zealotry are the enemies of sound fiscal policy, but these vices are plainly leading to the sort of political deadlock that spooks the market. It was a bad sign earlier this year when a handful of Republican senators, fearful of possible tax hikes, declined to vote for a bipartisan commission with statutory authority to recommend entitlement reforms — a measure those same senators had originally sponsored.
Investors, who are the market, have no truck with rightist rants against all taxes and government spending or liberal resistance to any entitlement adjustments. The markets are stern taskmasters, and they will exact a heavy price if America’s political class continues to flout the capitalist laws of supply and demand.
